Astute investors understand that proper diversification involves holding a range of investments in all asset categories—stocks, bonds, real estate, and cash—not just those that happen to be in favor at a given moment. Yet, many people may shy away from investing in real estate due to a lack of knowledge or experience. If you haven’t given much thought to how real estate can fit into your portfolio, here is a short course on some of the ways to invest in this sector:
Direct Ownership. Many people already own real estate in the form of their homes, but they typically don’t consider their personal residences as part of their asset allocation strategy. This is because many people buy their homes principally as places to live, rather than as investments. Nevertheless, a home typically represents one of the largest purchases most people will ever make and when they do sell, they hope they will be able to realize a profit. Consequently, although home ownership has personal use attributes (e.g., comfort, enjoyment) not usually associated with an investment, it also has investment attributes in that most people are careful to preserve and enhance its value.
Investing in real estate can also be accomplished by purchasing properties such as apartment buildings, rental homes, or office buildings. These investments generate rental income that can be partially sheltered through depreciation write-offs, and they also have the potential to be sold for profit. However, this type of investing can be time consuming. It requires knowledge of local residential and commercial markets, and may be more appropriate for those who desire to become landlords. One option is to turn over landlord responsibilities to a professional management company, but this transfer of responsibilities comes with a cost that will affect your bottom line.
Public and Private Limited Partnerships. Commonly referred to as “passive activities,” limited partnerships typically involve a number of limited partners investing in a property (or group of properties) managed by a general partner or sponsor, such as a brokerage firm. Although partnerships tend to be illiquid as short-term investments, under the right circumstance they may still be viable entities for investing in real estate.
REITs. Real Estate Investment Trusts (REITs) pool investor money, much like a mutual fund, and use professional management to oversee a portfolio that may include properties (Equity REITs), mortgages (Mortgage REITs), or both (Hybrid REITs). REITs usually specialize in specific types of property, such as shopping centers, office buildings, and health care facilities. They may also specialize based on geographical location.
REITs offer investors a way to participate in the real estate market with greater liquidity than limited partnerships and with less personal involvement than direct ownership. They are easily traded on the major stock exchanges and the price generally fluctuates like a stock’s, although for different reasons. Also, a large percentage of a REIT’s taxable income must be paid out to shareholders. Investment return and principal value of REITs will fluctuate due to market conditions, so that shares, when redeemed, may be worth more or less than their original cost.
Mutual Funds. Some mutual funds focus on real estate by investing in REITs and real estate-related industries, such as building supply companies and home furnishing manufacturers. Compared to REITs, which tend to be more narrowly focused by industry and region, real estate mutual funds tend to be more broadly diversified.
Expand Your Horizons
Real estate remains an important asset category, even if investors’ attention is occasionally drawn elsewhere according to market swings. Perhaps it’s time to reconsider the role real estate might play in your investment program, particularly if you are concerned about an allocation strategy that includes all asset classes. Bear in mind, past performance is never an indication of future results. In addition, be sure to read the prospectus before investing in any security or variable product.
Copyright © 2015 Liberty Publishing, Inc. All rights reserved. Distributed by Financial Media Exchange
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.